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How can I protect my family business during a divorce?

Divorces can significantly impact the financial footing and operations of a family business. Business owners navigating divorce are wise to take steps to safeguard business interests. The rules that guide options during divorce vary by state. In Tennessee, equitable distribution laws govern property division during divorce.

Three steps business owners in Tennessee can take to protect the family business during the divorce include the following.

1. Pre-marital and post-nuptial agreements

The saying about an ounce of prevention being worth a pound of cure holds true when it comes to divorce. Ideally, couples will take the time to proactively discuss how certain assets would divide in the event of a divorce. This can help reduce headaches in the future. There are two different legal documents that can help achieve this goal:

  1. Pre-marital agreement: A couple can create a prenuptial agreement before marriage to legally outline that certain assets, like business interests, remain separate property during a divorce. This serves as a way to protect this asset from division during divorce.
  2. Post-nuptial agreement: Those who are already married can use a postnuptial agreement to achieve similar results. This agreement clarifies ownership and helps to safeguard against a spouse gaining an ownership interest in the business during a divorce. As the name suggests, this document is created during the marriage.

Although each of these agreements can protect the business interest from division during divorce, it is important to note that the courts may still take the value of the asset into consideration during the property division portion of the divorce. Although the business would likely be part of your assets after the divorce is finalized, the other spouse may get a larger portion of another asset to help balance things out.

2. Business organization documents

The documents used to create and guide business operations can also protect the business in the event the owner goes through a divorce. It may be possible to include provisions within Operating Agreements or Bylaws to prevent spouses from acquiring ownership interests.

Another possibility is to implement a buy-sell agreement among business owners. This agreement outlines what happens if one owner divorces or wants to sell their share. It can restrict ownership transfer to non-owners, including spouses.

3. Negotiate an alternative property division

It is possible to protect the business even if these other legal documents are not in place. One option is to negotiate an alternative. Instead of giving up business ownership, you might agree to give up your share of homeownership in exchange for the business. This creative approach can protect your business interests.

Navigating divorce while safeguarding your family business requires strategic planning. Consult with legal professionals to tailor these strategies to your specific situation. Remember that proactive steps both before the divorce and during divorce negotiations can preserve your business legacy even during challenging times.

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